Air France-Lufthansa cost gains evaporate on euro hit, economy

Thursday

Oct 31, 2013 at 12:01 AMOct 31, 2013 at 3:45 PM

(c) 2013, Bloomberg News.

(c) 2013, Bloomberg News.

TOULOUSE, France — Air France-KLM Group and Deutsche Lufthansa AG, Europe's two biggest airlines, are struggling to reach earnings goals as a stronger euro and sluggish economic growth wipe out the benefits of sweeping savings programs.

Regional No. 1 Air France said Thursday that earnings before interest, tax, depreciation and amortization will reach about 2.5 billion euros ($3.4 billion) in 2014, the bottom end of a targeted range, while Cologne, Germany-based Lufthansa said 2013 operating profit will be 700 million euros at the most, less than one-third of the 2.3 billion euros targeted for 2015.

A strengthening euro cost the two airlines more than 500 million euros in third-quarter revenue. The currency is the best performer among 10 developed-market denominations this year, meaning the value of ticket sales in other major economies was diminished when translated into the joint European coinage. Both companies said that air-cargo markets have been weak as the European economy struggles to attain pre-recession growth rates.

"We're not seeing enough performance, with the revenue picture anemic, so the market is very skeptical about either airline achieving their earnings targets," said Stephen Furlong at Davy Holdings in Dublin. The analyst has a "neutral" rating on Air France-KLM and an "outperform" on Lufthansa, which he reckons has a better chance of delivering on cost reductions.

Air France-KLM, which in July had predicted 2014 Ebitda as high as 3 billion euros, fell as much as 2.9 percent and was trading 1.2 percent lower at 7.63 euros as of 12:30 p.m. in Paris, where it's based, paring gains this year to 9 percent.

Lufthansa fell 2.4 percent and was later priced 1.7 percent lower at 14.43 euros. The shares are up 1.3 percent this year.

Both stocks are lagging behind the 39 percent year-to-date advance in the six-member Bloomberg EMEA Airlines Index, where the best performer is rival network operator International Consolidated Airlines Group SA, parent of British Airways and Spain's Iberia, with a 91 percent gain.

Air France-KLM and Lufthansa have embarked on their most extensive savings and restructuring efforts since the global slump as they seek to pare the cost base and render unprofitable short-haul routes viable in the face of price competition from discount operators led by Ryanair Holdings Plc and EasyJet Plc.

Pressure for savings has already driven Air France-KLM to expand plans for 2,880 voluntary job cuts, and the main French business last month scrapped a goal of breaking even this year. Additional measures will deliver their full effect in 2015 and a targeted 2 billion-euro reduction in debt is now set for that year instead of 2014 amid "an environment of low growth and high oil-price and currency volatility," the company said.

Europe's biggest airline by passenger traffic will shrink short-haul operating losses by only 200 million euros to 650 million euros in 2013, with the shortfall coming almost wholly from the French unit and Dutch arm KLM likely to be close to breaking even, the company said. It's aiming for a 500 million- euro improvement by 2015 versus 2012 levels, indicating a loss of 350 million euros even for that year.

Air France-KLM said currency fluctuations wiped 233 million euros from revenue in the third quarter while delivering a 180 million euro cost saving as the stronger euro reduced the expense of dollar-denominated fuel purchases, resulting in a net hit of 53 million euros.

At Lufthansa the exchange-rate changes cut three-month revenue by 341 million euros, Chief Financial Officer Simone Menne said on a conference call, adding that their impact highlights the need for cost efficiencies and shows the carrier must be "even more commercially robust."

The weakness of cargo markets means that 140 million euros in divisional savings at Air France-KLM will deliver only a 50 million-euro year-on-year operating profit improvement in 2013. The company will phase out three more Boeing Co. 747s and one Boeing MD-11 to cut its full freighter fleet to 10 a by 2015.

Lufthansa said today that operating profit at its cargo business -- one of the world's largest -- will fall this year, while adding that the fourth quarter is showing positive signs.

Third-quarter operating profit fell 12 percent to 589 million euros at Lufthansa, while gaining 29 percent to 634 million euros at Air France-KLM. The Paris-based company's net income fell 50 percent to 144 million euros, clipped by a 137 million euro-charge against losses and share-value depreciation at Italy's Alitalia Spa, in which it has a 25 percent stake.

Analyst estimates collected by Bloomberg suggest Air France-KLM will post Ebitda of 2.34 billion euros next year, missing its reduced target by 160 million euros. Lufthansa, targeting an operating profit of 2.3 billion euros by 2015, may achieve only 1.65 billion euros by then, the forecasts suggest.

Davy's Furlong said the German carrier is ultimately the better pick out of the two because of its superior record in delivering on its plans "in the end." London-based IAG, which reports Nov. 8, is outperforming both as it's more exposed to buoyant trans-Atlantic markets, has communicated its strategy better and has been "quick and brutal" in executing cuts.